A hollow victory: Municipal debts for new homeowners

• South Africa

• Real estate

07-09-2017

Section 118(3) of the Local Government: Municipal Systems Act, 2000 has become a popular subject of dispute before our courts. This section provides that any amount due for municipal services in respect of a property is a charge upon that property which enjoys preference over any mortgage bond registered against the property.

This particular matter arose when City of Tshwane and Ekurhuleni Municipalities suspended municipal services to various properties on the basis that outstanding amounts were due to the municipalities. The various property owners were refusing to settle the outstanding debts as they were relatively new owners and the amounts outstanding were for services rendered prior to them taking ownership. In other words, the municipalities sought to hold the current owners liable for the debts of the historic property owners.

eThekwini Municipality was joined to the proceedings as a friend of the court and all three municipalities argued that a proper interpretation of s118(3) meant that the charge would survive transfer of the property, holding current owners liable for historic debts. They argued that this extra-ordinary debt collection measure was necessary in order for them to fulfil their constitutional duties of service delivery for the greater good.

Also admitted as friend of the court were The Banking Association of South Africa (BASA). They argued that the actions of the municipalities not only amounted to an arbitrary deprivation of property for the new owners, but also a deprivation of real security rights of any bondholder who extends a loan to the new owner expecting the property to stand as security post transfer.

The court held that the mere use of the word “charge” in s118(3) does not automatically make any amounts due transmissible to successors in title. The court found that the correct interpretation of the section is that the charge does not survive transfer of the property to a new owner and in so doing the section would not be contrary to the constitution. The municipalities conceded that accepting this interpretation of s118(3) would not affect their other powers in the Act such as, insisting that owners settle their outstanding debts prior to selling their property, including the power to interdict any impending transfer until such time as the debts have been settled.

The court recognised that whilst the municipalities were granted the order they sought (i.e. that s118(3) of the Act is constitutionally valid) in substance this was a victory for the property owners who should not be held liable for historic debts against their properties. As a result the municipalities were ordered to pay the legal costs of the action.